Month: July 2010

Michael Gove was right to apologise yesterday. When he made his statement to the Commons about Building Schools for the Future he should have shared with us the list of projects affected. Where his Labour predecessors might well have tried to “bury bad news” without volunteering a statement, he correctly appeared, but unfortunately did not share all he knew. He made a fulsome apology, and took full responsibility for mistakes made by others as well as himself.

He now, however, has two other problems not covered by his misjudgement about what to say and not to say in the original statement. The first is the failure of his department and the associated quangos to provide him with accurate lists of the schools covered by the Schools for the future programme. Given the huge sums spent on the bureaucracy of these building schemes, and the generous staffing of his department and the related quangos, it is predictable but worrying that they could not supply the boss with a simple list of all the schools under the programme, and with a related schedule of which ones were currently approved for building and which were not.

This should be a timely reminder or wake up call for all Ministers. The levels of administrative and advisory competence are not always as high as they need when running a busy department. The Minister himself has to check the detail and insist on higher quality work. All the extra spending and recruitment of the Labour years has not created a more competent administration.

The second is the presentation of what the government is doing. In the statement I heard Michael Gove make he was clear in saying he was cancelling the approach of Building Schools for the future because it was an expensive, long winded and inefficient way of building schools. He did not say he was cancelling all new schools building. Indeed, if he is right and he can save substantial sums on the box ticking detailed regulatory approach of the old programme this could leave him with more moeny to spend on bricks and mortar. This message has got entirely lost in the broadcasts and newspaper stories about cuts, leading most people to think there will now be no new schools.

This needs turning round as quickly as possible. According to the figures the Coaliton government is going to spend as much on new capital projects as the outgoing Labour government. In that case they might end up building more schools than Labour for the same amount of money if Mr Gove is right about how to do it more cheaply. I asked him what savings he expected from stopping the BSF approach. He said he would write to me with the answer. The sooner I get that letter the sooner he can tell the country about the waste that is being eliminated and the extra money that should then be available for bricks and mortar.

Ministers would be wise to tone down the rhetoric of massive cuts. They need to mobilise, energise and reform the public services. Labour made clear in their marathon moan in the Commons yesterday into the early hours of this morning that they are out to talk the economy down, highlight alleged huge cuts in jobs and services and campaign with the Unions against sensible change. The government needs to be smart and careful in its choice of words to bring about the improvements in quality and performance needed.

This morning I am talking to the wider share ownership movement. We need to encourage new types of public service, where former state employees take on running their own public service. We need to offer participation in Third sector solutions to public service problems, and to use more companies to help deliver what we need.

The British debate is dogged by such a narrow definition of public service. To Labour a public service has to have state employees delivering a service free to users at the point of use through monopoly provision. Public monopoly can so often stifle innovation and give us the high costs of monopoly rather than the economies of scale. To me the provision of the daily bread, milk and newspaper is as much a public service as the local library or refuse collection. We need in each case to ask how can the public service be best delivered, where state money is involved, and find that right combination of companies, charities and direct employment which delivers the best answer. Often the popular feature of current public sector provision is being free at the point of use, which the government is pledged to keep, more than the method of delivery.

There are good people in state employment who would like the opportunity to run their own school, organise their own bit of public service, seek to do things better than they have been allowed to do under the top down state directed model of the last government. Labour last night showed in the debate they have learned nothing about to how to modernise and improve public service, still seeing it in a narrow partisan and ideological way. The one thing they are good at is running a strongly worded opposition to all change that might benefit us with better and better value public service.

On the Today programme this morning we debated the impact of public spending changes on the construction industry.
I argued that according to the Office of Budget Responsibility – and most private sector forecasts – overall investment in the economy is forecast to increase every year to 2015 from next year. Business investment will rise substantially, investment in housing somewhat, whilst public capital investment will fall until 2013 and then will start to rise again. The total figures are:

Investment
2009 – 14.9%
2010 -0.5%
2011 +3.9%
2012 +7.9%
2013 +8.8%
2014 +8.0%
2015 +6.9%

Total growth in investment 2010-15 40%
Total growth in investment 2009-15 19%

I am glad to say the others accepted that total investment is likely to go up over the next few years. They concentrated on falling capital expenditure in the public sector. The BBC’s Economics correspondent said that public capital investment was going to fall from £38.9 billion in 2010-11 to a low of £19.9 billion in 2013-14, before starting to rise again.

I said the departmental captial spending limits showed capital spending at £51.6 billion this year, falling to a low of £37 billion in 2013-14 before rising again. I could have used the gross public sector investment figures, which show spending of £59.5 billion this year, down to £43.3 billilon in 2013-14, before rising again.

The difference is important. The BBC figures are net of depreciation. In other words they take away from the amount spent an estimate of the losses on exisiting buildings and equipment from wear and tear and old age. This is not a cash item. It is an entirely notional figure. Their figures do incidentally show that despite the cuts the stock of government capital continues to rise.

The correct figures to use to assess construction output are the gross figures. This is the amount of money the public sector spends on capital spending, raised from taxs or borrowings. It is spent on new buildings and equipment.

I promised David Willetts I would review his book “The Pinch” . The sub title tells the story – “How the baby boomers took their childrens future – and why they should give it back”.

My first reaction was that he is wrong. His case that the baby boomers have amassed so much wealth in houses and pensions that they have made life difficult for their children seemed to miss the obvious point that the baby boomer’s children will benefit from their parents wealth. David argues that baby boomers have pushed house prices beyond the reach of too many young people, but surprisingly few children inherit homes because the baby boomers go on to spend the value of their home on a good time or later on care in old age. Yet I meet children whose parents pay their home deposit, children who inherit their parents’ homes, and younger people who work in the businesses and care homes that the elderly are spending their money on. One way or another the wealth of the older generation has to find its way into the pockets of the younger generation. You cannot take your wealth with you on death. Parents often remain very generous to their children long into their childrens’ adulthood. If they spend it on themselves instead, those younger people in work get some of the benefit.

My second reaction is he is right in one very important respect. The baby boomer generation has been very selfish when it comes to public spending. It was on the watch of those quintessential baby boomers, Blair and Brown, that the UK public accounts were trashed comprehensively. The baby boomers in power wanted to spend, spend, spend. The bills they have left will fall more to their children to repay than to themselves. The baby boomers treated themselves to a great party in office, and have left the bills to the generations that follow on as Ministers and taxpayers. Under Blair /Brown we were all plunged into debt to the tune of £50,000 a head if you take into account the unfunded pensions, the PP/PFI and the bank liabilities ther state took on. The state debts the boomers incurred remain for others to settle. The private debts of the boomers die with them, usually covered by the assets they also leave.

The baby boomers were not as bad as David implies. They avoided the ruinous European wars which killed so many and did so much damage to British power and wealth in the twentieth century. The boomers did not send their children under compulsion to fight. The generation of leaders who took us into the Great War of 1914-18 have more to answer for than the baby boomers. The presence of US power on European soil cemented the good intentions of the new European continental democracies not to fight each other after 1945.

The baby boomers have presided over a huge surge in income and wealth creation through their enthusiaism for the consumer and digital revolutions. It is good news that on their watch poverty in the west has been redefined from not having enough food and clothing, to not owning a car and some of the consumer durables most now take for granted.

As a keen advocate of wider ownership I agree with David in disliking the way in the last decade progress to better funded pensions for all has been aborted by the tax and regulatory raids on the pension funds. I also agree that we need to make home buying easier for the up and coming. That requires a different approach to banks and credit, as has often been described on this blog.

David’s book is thought provoking and informative. It reminds us that government decisions are often about transfers of income and wealth between the generations, seeking to help the young and the old from the taxes of the middle aged. It is a good idea to look at the wider issue of transfers between the generations and see the willing transfers that occur as well as the compulsory ones. I recommend it to readers as a useful quarry of information about social change and the Generational tussles.

Labour is out campaigning against 1.3 million alleged public sector job losses and compulsory redundancies. The government needs to put the record straight promptly before this camapign gets out of hand.

The official figure for job reductions in the puboic sector over the next five years is 600,000 according to the Office of Budget responsibility. This is around 10% of the public sector total. As 300,000 or so leave the public service every year you could save 600,000 with no compulsory redundancies at all. Where quangoes and offices are being closed down the employees could be offered something else elsehwere in the large public sector, as jobs become vacant.

Labour’s figure is 1.3 million or 20%. Over five years that is around the likely level of departures, but as far as Labour are concerned would entail redundancies as well. This figure is made up. The leak to the Guardian of “secret Treasury figures” was a leak of wrong Treasury figures. There is no secret plan to sack more than the OBR forecast. The OBR figure remains the best forecast. We can calculate a more accurate figure once we have seen the autumn spending round conclusion. That will depend on the balance between benefit bill reductions and the rest.

The government needs to be careful how it presents all this. Getting too many of your staff offside too soon when you need them to help you change the way public service is delivered would not be a good idea. They need to stamp on Labour’s attempts to whip up the public sector Unions.

I hear Danny Alexander has asked each department to tell him how they might cut 40% from their budgets – save the ring fenced departments.

I suppose it’s a useful starter to the conversation he needs to have with each to settle their figure for next year. I am not sure it is so useful to have people condemning such savage cuts, when the totals in the budget tell us there is no need to cut anything that matters by 40% or anything like that figure. The totals show spending going up every year in cash terms for five years. That hasn’t changed. There is so much newspaper space being wasted over the cuts that will never be. Please leakers spare us the parade of the bleeding stumps in public. It’s such a stupid old hat way of conducting a review of public spending.

The politics of bashing banks is good. They are widely blamed for the last collapse. The people who regulated them, and the Central Banks who set interest rates and rushed from boom to bust with the money supply have escaped much of the blame. Many of the commercial banks’ Directors and senior executives earned too much money for most people’s stomachs, and then had the temerity to carry on paying themselves bonuses after the crash. Some banks profits have roared back strongly after the losses of 2008-9, whilst taxpayers remain sandbagged by the worst debts.

Against such a mood and armed with such lopsided analysis it is popular for governments to demand controls on bonuses, taxes on profits, and require banks to hold more cash and capital. The first of these does not seem to work, the second will reduce banks cash flow as they try to rebuild their cash and capital positions, and the third will cut their lending.

The sad truth is, whether the politicians hate them or loathe them, we need the banks and we need them to finance a recovery. Some bloggers say they do not want more credit to be extended. I have to tell them, without more credit there will be little growth and fewer new jobs. Some critics say businesses do not want to borrow more money, because they do not enjoy the demand for their products. They should note just how strong growth is elsewhere in the world, and how there are already shortages of product at home in the UK early in the cycle. We do need UK business to make more here to susbtitute for imports,and to export to faster growing countries. That requires working capital and investment finance.

The world’s governments and regulators genuflect to the idea that they should switch from pro cyclical regulation to counter cyclical regulation. They now accept, looking back, that in the upswing in 2005-7 they reinforced the credit boom by relaxing controls, and in the downswing, 2007-9, they reinforced the fall by being tougher. So why can’t they now agree that this is still somewhere near the bottom of the cycle? Isn’t this the time to say we have done enough to rebuild the cash and capital of most banks? The UK Tier One ratios now average around 12%, well above the levels of 2006-7, and good enough for the first phase of the upswing.

The sad truth is governments have to allow banks to make more profit to rebuild their reserves and pay off past losses. It will not make either the banks or the governments popular, as people resent bank charges and interest rate premia. It is however essential to get a well financed recovery. If we had more competition in the UK banking the charges would be lower and the costs better controlled. A lack of sufficient competition leads to high bonuses and high salaries.

It’s time for regulators to say, job done for the time being. They should look again at the adequacy of cash and capital once we’ve had some growth.

When Ken Clarke was Chancellor he was lucky. He took over after all the difficult decisions had been put in place by Norman Lamont to get the then deficit under control. Reducing the deficit was a necessary but not sufficient condition for recovery. He took over when world trade and the world economy were going well, and the British banks were able to lend. As a result the economy grew well and the deficit shrank.

George Osborne has to do the same on a bigger scale. He needs to make his own luck. He has done the difficult thing, setting out a new path to cut the deficit. He now needs to make it more lilely the private sector will grow as fast as is needed to do the rest. World trade and the western economies cnanot be relied on to grow as quickly as we would like given the state of Euroland and the wobbles in the US. Meanwhile the UK banking system is not delivering the cash and credit to UK industry and comnmerce that it needs to be more confident and to put in more capacity.

The government needs to make changes to the banking industry to ensure more competitive credit is available to finance recovery. It will not wish to pre-empt the important Vickers review of retail and investment banking, by expressing a view on whether the two should be split. It could conclude now that the UK retail banking market is not competitive enough and start to do something about it. We need the banks to deliver more now, not in two years time.

I have two suggestions. The first is to hold a competition for new banking licences for suitable companies and consortia to aply for, to give a push to the rumours that there are people and businesses wanting to set up as banks. They can apply anytime anyway, but it would show the government is keen and will listen with their Regulators to the needs of the wannabes to get something going.

The second is to package up two, three or four UK retail banks from within the RBS and Lloyds/HBOS empires for sale. These conglomerate banks hold many brands and franchises, ranging from Nat West and Halifax to Lombard, Cheltenham and Gloucester and Birmingham Midshires. Some of these have been fully integrated, others still have some independent identity wthin the global banks. It would be possible to make up a package of branches, assets and liabilities in each case, sell them on to the market with a new quote, and raise new capital to give them growing room at the same time.

The UK needs say five new banks with starting capital of say £5 billion each, allowing them to establish a combined balance sheeet of say a conservative £200 billion. That would allow a useful injection of new cash into suitable UK business projects. We have a more competitive pound, lots of empty buildings and plenty of unemployed labour. We need the cash to get it back to work.

The outgoing PM in Australia serves as a warning to incumbents. If you combine unpopular climate change legislation with a big tax increase, you lose your job. The legislation was defeated, and the tax increase on mining has now been abated.